Hedging Innovation Risk to Support Experimental Strategy During Disruption

Ed Marsh | May 18, 2018 6:30:00 AM

If you want unique growth for your business you have to speculate....and do so safely

Introduction to SignalsFromTheOP

Guide to episode

  1. If you're content as a beta investor (riding the market trends), then don't bother reading.
  2. If you're concerned that disruption could impact your business and you want to find opportunities, you'll have to speculate
  3. But speculation can be risky - you need to hedge so you're unlocking unique growth without "betting the company"
  4. Here are some simple tips for industrial manufacturers to hedge risk while they look for "alpha" growth potential

Transcript follows

I'm Ed Marsh. Thanks for joining me for this episode of Signals from the OP. If you've seen Signals before, you know that I use this as an opportunity to talk about issues that, I believe, are of strategic importance for industrial manufacturers that are thinking about ways to improve revenue growth.

Today, I want to talk about hedging against disruption. Now, let's start here. Let's start with a simple analogy, and you can decide. Maybe I can even say maybe this video isn't for you. If you're an index fund investor, in other words, if you just look for beta returns, then let me save you the next four to five minutes. You're going to think I'm nuts. Go back to work or on your email.

On the other hand, if you're an alpha investor, if you look for that opportunity, that extra edge, then I think we have something to talk about. If you're looking for that kind of edge, you probably ask yourself some questions, things like, what big ideas do you see, do you intuit that you think others don't? What happens if you're wrong? What's the upside if you're right? How can you hinge the risk? Those are normal kinds of questions if you're a speculator, if you look for alpha type investment opportunities.

This is a big piece of where I spend my strategy time working all with clients. What are the trends that are going to impact their business, their clients' or their customers' business, and their customers' customers? Those are the things that I think, often, slip past the radar of competitors, and create really unique and strategic opportunities.

In the industrial space, for instance, what's really the role for sales going forward? The trend toward past product as a service or product service systems, it's a big one. How about the plunging cost of distance, as Karen Harris of Bain calls it? 3D printing, drone deliveries, et cetera, it's changing the economics of manufacture and distribution. Demographics, as biotech extends healthy working lives completely changes the question about workforce availability. Then, I mean, there's, obviously, for every industry, some more industry-specific kinds of topics, and opportunities, and threats, and disruptions as well.

If you get the concept of investing for alpha, then you're probably naturally comfortable with doing some speculation. You experiment. Some bets payoff. You think some may pay off big, and you're disappointed. The point is whether they pay off or not, you hedge at risk. You look for those opportunities, you speculate, you hedge the risk. You've got to control downside. In many cases, you got a really big upside. I think there's ways that companies can do this in this space of industrial disruption as well.

For instance, capital equipment manufacturers could take back some used equipment. Actually, use that as a way to help get a transaction done for some new equipment, refurbish it for ultimately low cost. Then, they've got something on their books for very little money that they can actually use to begin to experiment with the past model, product or service model, rather than a traditional capital sale where the company pays for all upfront.

They could find a great longstanding customer, maybe the kind of customer with whom ... I work, often, with capital equipment manufacturers where they might put some parts into a facility on consignment in support of a large agreement, number of machines on the floor, number of locations, et cetera. What if they took a 3D printer and put it into that customer on some sort of trial basis, perhaps as an alternative to some of the parts that they might be putting in their own consignment?

Maybe they could offer machine monitoring as a service. Just an optional add-on to the equipment that they're selling right now that allows them to begin to build a body of data and understand how they can monetize other services and monitoring, and alarms, and alerts, and reports, and maintaining the records the companies need to be able to refer back to them for compliance and other kinds of things.

They could also fund a multidisciplinary skunkwork. People from marketing, and sales, and legal, and finance that work together look for interesting ideas from other industries. At the intersection of industries, maybe they've got a specific budget. Maybe their charge was coming up with a certain number of ideas per quarter, vetting them, and prioritizing them, and presenting them to a senior management team for insights, and opinions, and plans on whether or not to begin to execute it.

They could even, depending on the size of the business, have some sort of small fund that they use to invest in promising technologies in other companies. By making those investments, access the information, and learnings, and the technology, and rights to use it, perhaps preferential rates over competitors in this space, and maybe make some money on those investments as well, but learn about the change in disruption that's happening.

All of these things can be done at a relatively low cost. I mean, the $20 million company can take a number of these steps. $100, $200, $500-million company could allocate a couple of million dollars a year to fund this entire operation, which wouldn't cost a ton of money with potential significant upside and hedging to the downside. That's really the key. The point is to manage the risk, not to eliminate the risk, but to manage it. Look for those alpha opportunities without vetting the company out of risk.

Fundamentally, the question is, I guess, do you believe as I do that this time is different? If you believe that the transformational technology changes in the way products are manufactured and distributed, the changes that the internet is introducing to buyer behaviors and the implications that has on business, if you believe that this time is different, then we may not know exactly what it's going to look like in 10 years, but we know it's not going to look like some linear extrapolation of the way it has for the last 50. We have to begin to take some steps. We have to experiment. We have to put ourselves in position with some managed risk and speculation to find those opportunities and take advantage of them.

If you like this kind of look at some of the challenges and traditions of industrial manufacturing revenue growth, I welcome you to subscribe to this video blog. I post videos about once a week. You can subscribe at SignalsFromTheOP.com. That's SignalsFromTheOP.com. I'm Ed Marsh. Thanks very much for joining me.

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